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Homesingapore business partnershipsTo minimise electricity price volatility, Singapore will centralise procurement and supply of...

To minimise electricity price volatility, Singapore will centralise procurement and supply of gas

SINGAPORE: In a bid to avoid wild swings in electricity prices brought about by energy shortages, the Singapore government will establish an entity to centralise the procurement and supply of gas for the power sector.

The entity will aggregate gas demand from power generation companies (gencos), which currently each decide on the volume and tenure of gas to procure based on their own commercial considerations. 

Unveiling the centralised gas procurement framework in his opening speech on Monday (Oct 23) at Singapore International Energy Week (SIEW), Minister for Trade and Industry Gan Kim Yong noted that a stable and secure power system was crucial in the transition towards net zero emissions.

In his speech to industry professionals and policymakers, Mr Gan said decarbonisation efforts were at stake.  

“We observed this during the recent global energy crisis, when some countries had to resort to refiring coal plants to bring down electricity prices,” said the minister. 

He noted that the world was likely to experience more episodes of volatility as the energy transition progressed. 

“Our experience in recent years has demonstrated that our current gas procurement framework, which relies on individual power generation companies’ procurement strategies, does not provide assurance that the system, as a whole, will have enough gas to meet our needs during a crisis when market conditions are uncertain.

“As the global gas market conditions are expected to be more volatile with the energy transition, we need to rethink our approach to gas procurement.”

Mr Gan stressed the need for secure and reliable natural gas supplies as 95 per cent of Singapore’s electricity is generated with natural gas.In its 16th iteration this year, Singapore International Energy Week is an annual event. It will run until Friday at the Sands Expo and Convention Centre at Marina Bay Sands.

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GASCO TO BE SET UP BY 2024

The Energy Market Authority (EMA) expects to set up this new entity, referred to as Gasco for now, in 2024. 

The new framework comes on the back of the global energy crunch last year, when electricity prices rose multiple folds due to fossil fuel shortages exacerbated by the Ukraine war, severe disruptions in renewable power, as well as global oil and spot gas price spikes.

Before that, surging gas prices due to global demand and supply factors in 2021 caused an energy crisis that severely tested Singapore’s electricity market. Gencos were reluctant to contract for gas, over fears they would be left holding on to expensive gas inventories should prices moderate subsequently.

This increased the risks of gas shortfalls and caused prices in the wholesale electricity market to surge. Six electricity retailers exited the market within weeks, unable to deal with the extreme volatility. 

In a press release following Mr Gan’s announcement, EMA echoed the inadequacies of the current gas procurement framework.  

“When each genco seeks to optimise for itself, it can inadvertently lead to sub-optimal system-level outcomes,” the EMA said, referring to last year’s global energy crisis.

“Gencos have also been reluctant to enter into long-term gas contracts, which typically offer a greater certainty of delivery and price stability. 

“This is because gencos do not want to be exposed to gas market volatility and uncertainties in the long term. In addition, global developments and the energy transition are likely to lead to more volatile oil and gas markets, which may further reduce the risk appetites of generation companies.”

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GASCO HAS ECONOMIES OF SCALE, STRONGER POSITION TO NEGOTIATE

With the new framework, if the overall electricity demand exceeds that indicated by the gencos, Gasco will procure the additional gas volumes needed.

As the sole procurer of upstream gas for the power sector, Gasco will be in a stronger position to negotiate for more favourable contracting terms and optimise system needs, EMA said. 

With greater economies of scale, Gasco can procure gas from diversified source countries to reduce concentration risk. It will also be able to enter longer-term gas contracts, providing more stable prices and supply. 

When implemented, the centralised procurement approach will apply to all future gas demand from the power sector, including gas contract renewals. 

Gencos will be allowed to continue with the existing gas supply contracts they have with their respective gas suppliers. 

Other industrial gas customers can continue to procure gas through licensed gas importers and will not be subject to this central procurement framework.

The new framework is meant to complement guardrails implemented this year, such as a centralised process to coordinate the entry and exit of generation capacity and a temporary price cap mechanism to guard against extreme price volatility in the wholesale electricity market. 

The authorities will consult the industry on the details of the centralised gas procurement framework in the coming months.

Describing the new framework as a “fundamental shift” in the approach towards gas procurement, Mr Gan said it was necessary to create a more stable and secure power system that will ultimately benefit the consumers and also the gencos. 

“This stronger foundation will then allow us to push ahead with our energy transition,” he said. 

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